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Breakingviews: China needs to widen mark on GDP target

Wednesday, November 05, 2014 - 02:20

China loves its growth targets but needs to provide a degree of flexibility so it can handle unpredictable economic factors, says Breakingviews' Peter Thal Larsen.

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(SOUNDBITE) (ENGLISH) REUTERS REPORTER, TARA JOSEPH, SAYING: "The world's biggest central orientated economy, China, loves its growth targets Peter. But what are they worth?" (SOUNDBITE) (ENGLISH) ASIA EDITOR, REUTERS BREAKINGVIEWS, PETER THAL LARSEN, SAYING: "Well they're not worth very much really, and I mean this is part of the problem. It's that China kind of has to every year, sets this target and then has to kind of limber up and try and do everything it can to meet the target one way or another. And that really is at odds with China's stated aim of making the economy more market based and kind of relaxing some of the state controls. So we think it's pretty unlikely that they're going to get rid of the target all together. But we think that one thing they could do is actually instead of setting a single specific numerical target would be to have a range. So instead of saying seven and a half percent growth, say seven to eight percent growth; or something like that. And that would at least acknowledge that GDP is not something that you can set in advance and is dependent on outside factors like world trade." (SOUNDBITE) (ENGLISH) REUTERS REPORTER, TARA JOSEPH, SAYING: "You're asking for a degree of flexibility here, why would China want to introduce flexibility? Look at how much trouble it's already having with capital reforms." (SOUNDBITE) (ENGLISH) ASIA EDITOR, REUTERS BREAKINGVIEWS, PETER THAL LARSEN, SAYING: "Well the reason very simply is that the target creates all kinds of perverse incentives and distortions. So China sets the target at the beginning of the year, then the economy kind of limbers into action and tries to kind of meet this target. And if there's any sign that it's may be undershooting on the target then suddenly you get a real incentive for over investment. "The other thing that happens is that the provinces, the regional provinces, they're all there sort of -- incentives are also set on meeting a target. And actually that leads to massive over reporting of GDP. Most of the provinces actually report numbers, which if you add them all up, add up to more than China's total GDP. So it just shows that there's a lot of activity in trying to meet this target that is unnecessary and wasteful. And if China had a range, at least they would be able to have -- it would give them some flexibility and be able to say -- acknowledge -- that not all of this is totally within their control." (SOUNDBITE) (ENGLISH) REUTERS REPORTER, TARA JOSEPH, SAYING: "China's specific growth target out of date. Breakingviews suggests a more flexible target range." ENDS

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Breakingviews: China needs to widen mark on GDP target

Wednesday, November 05, 2014 - 02:20